Pratiksha Ranchod
Introduction to Accounting
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In the 15th century Luca Pacioli developed
the 1st method of recording business
transactions.
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Accounting is a language used to record
financial transactions.
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Users of financial information
Users of Financial Information
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Financial institutions
Owners
Management
Employees
Suppliers
Investors
Government
Community
Customers
Uses of accounting information
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Financial condition of the business
Profit or loss
Departmental performance
Which activities or products made profits
Make or buy?
Cost of production
Impact of existing and new policies
What changes should be made
Uses of accounting information

Increased volume of transactions
◦ Accounting records eliminate the need to
remember all the transactions
Enables business to compare results
 Taxation authorities are able to rely on the
information prepared
 Proper record keeping  good evidence
 Financial records  basis for negotiations
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Generally Accepted Accounting
Practice
GAAP – framework of accounting
standards, rules and procedures
 IFRS – International Financial Reporting
Standards – used to be IAS
 APB – Accounting Practices Board –
official accounting standard setter in
South Africa
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The Balance Sheet
Assume we bought a house (property)
with a cost of R 750,000
 We obtained a home loan to finance the
purchase of the property for R 500,000
 How much did we have to contribute
towards the purchase of this property?
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The Balance Sheet
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The Balance Sheet therefore represents
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What we
OWN
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What we
OWE
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Owner
Third Parties
Accounting Equation
What we
What we
Accounting Equation
What we
What we
Assets = Owner’s Equity + Liabilities
Accounting Equation
What we
What we
Assets = Owner’s Equity + Liabilities
R 750,000 = R 250,000 + R 500,000
Accounting Equation
Assets = Owner’s Equity + Liabilities
Owner’s Equity = Assets - Liabilities
Liabilities = Assets – Owner’s Equity
Introduction to Financial
Statements

There are three basic financial statements
which are important to understand how a
business is performing.
◦ Statement of Financial Position,
◦ Statement of Comprehensive Income
GAAP Principles
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The business entity principle
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The continuing “going” concern concept
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The materiality principle
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The principle of prudence
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The objectivity principle
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The time period concept
GAAP Principles
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The revenue recognition convention
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The matching principle
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The cost principle
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The consistency principle
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The full disclosure principle
Principles
Definition
1
Business entity
A
Usually record income when invoice is issued
2
Continuing
concern
B
Outstanding lawsuits, disputes, pending mergers, etc. should be
included in the notes to the financial statements.
3
Materiality
C
The way/method in which something has been measured, has
remained the same from one period to the next.
4
Principle of
Prudence
D
Cost of sales relating to sales it helped to generate, must be recorded
in the same period as such sales
5
Objectivity
Principle
E
Accountant may leave out an adjustment in the books if it will make
no significant difference to the stakeholders’ interpretation of the
financial results.
6
Revenue
Recognition
F
Vehicles purchased by a business must be brought into the books at
the actual cost price – even if the asset was bought at a price much
lower than market value.
7
Time period
concept
G
Another accountant would have arrived at more or less the same
financial result.
8
Matching
Principle
H
The assumption is made that the business will continue to operate
indefinitely.
9
Cost Principle
I
Vehicle registered in sole trader’s personal name should not be listed
in the books of the business
10
Consistency
J
Financial results should always be subjective
K
Rather understate the value of assets & income, and overstate
liabilities & expenses
L
Financial year could be different from calendar year
Business Forms
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Legal personality
Starting procedures
Obtaining capital
Ownership & management
Distribution of profits
Income tax
Sole Trader / Proprietor
Financial Accounting vs
Management Accounting
Financial accounting
Management accounting
Reports to stakeholders outside
the organisation: Owners, lenders,
SARS, regulators
Reports to stakeholders inside the
organisation – planning,
controlling, directing, motivation &
performance evaluation
Emphasis is on summaries of
financial consequences of past
events
Emphasis is on decisions affecting
the future of the organisation
Data must be objective &
verifiable
Data must be relevant and flexible
Precision of information is required
Timeliness of information is
required
Summarised for the entire org
Detailed segment reporting
MUST follow GAAP/IFRS/IAS
Not necessary
MUST report using AFS
No specific requirements
Management Accounting
Planning
Controlling
MGT
Leading
Organising
Transactions take place
Source Documents summarise the transactions
Journals summarise the source documents
The general ledger summarises the journals
The Trial Balance summaries the general ledger